TPP and Exchange Rates
The Trans-Pacific Partnership (TPP) has achieved an important distinction in the annals of debates over trade policy. It is the first US trade agreement accompanied by a declaration on macroeconomic policies and exchange rates. The provisions of that declaration, released with the TPP text on November 5—especially taken together with new legislation pending in the Congress—should strengthen the US Treasury Department's ability to deter currency manipulation by our trading partners, including future members of the TPP. While not legally enforceable, the commitments in the declaration are far-reaching in ruling out competitive devaluations and persistent exchange rate misalignments. In addition, the requirements for more transparency and public disclosure of data on exchange rate policies, including currency intervention, should make the "naming and shaming" of manipulators more effective.
The term currency manipulation refers to the practice by some countries of artificially depressing the value of their currencies in order to increase exports and reduce imports. World trade rules have long obliged countries to avoid such practices on the ground that they dilute the impact of negotiated trade reforms. But enforcement of these obligations depends on certification by the International Monetary Fund (IMF) that a country's exchange rate policies were contravening IMF obligations as well as distorting trade flows. No multilateral enforcement actions to counter currency manipulation have been taken in the almost 70-year history of the postwar economic system.
Concerned about the currency practices of China and other US trading partners in the last decade, the Congress adopted two principal negotiating objectives regarding exchange rates when it enacted Trade Promotion Authority (TPA) authorizing President Obama to negotiate the TPP last summer. With respect to currency practices, the TPA declared that the principal objective of the TPP was to be "that parties to a trade agreement with the United States avoid manipulating exchange rates in order to prevent effective balance of payment adjustment or to gain an unfair competitive advantage over other parties to the agreement…." With respect to unfair currency practices, the principal objective of the TPA was "to seek to establish accountability through enforceable rules, transparency, reporting, monitoring, cooperative mechanisms, or other means to address exchange rate manipulation involving protracted large scale intervention in one direction in the exchange markets and a persistently undervalued foreign exchange rate to gain an unfair competitive advantage in trade over other parties to a trade agreement." These objectives are to be pursued consistent with IMF and World Trade Organization (WTO) obligations.
The new accord on currency is contained in a document entitled "The Joint Declaration of the Macroeconomic Policy Authorities of Trans-Pacific Partnership Countries." It contains commitments by each TPP member to "foster an exchange rate system that reflects underlying economic fundamentals," "avoid persistent exchange rate misalignments," and "refrain from competitive devaluation." To help keep macroeconomic authorities on the straight and narrow in meeting these objectives, the Joint Declaration requires each country to make regular and public disclosures on foreign exchange reserves, intervention in spot and forward currency markets, portfolio capital flows, and other actions.
In addition, the Joint Declaration establishes a new consultative mechanism to monitor the exchange-rate and macroeconomic policies of the TPP countries. The member countries are to meet together at least annually and issue reports on their efforts to fulfill the obligations of the declaration. With the augmented data, such reviews can be timely and effective in helping to deter currency manipulation.
The consultations on macroeconomic policies can and undoubtedly will include monetary policies, such as quantitative easing (QE) as practiced recently by the United States and currently by Japan. Some US officials and members of Congress have expressed concern that other countries might seek to characterize QE as "currency manipulation" by the United States itself, on the ground that QE can lead to a currency depreciation. That is certainly a possibility. But there is widespread international agreement that there are fundamental differences between QE and manipulation: QE pursues domestic economic goals through the use of domestic policy instruments, while manipulation by definition refers to direct intervention in the markets for foreign currencies. In addition, QE increases global as well as domestic demand by increasing the growth of the country involved, while manipulation simply shifts demand from one country to another by reorienting and indeed distorting trade flows. Finally, QE enhances the economies of trade partners while manipulation weakens them. Accordingly, the fear that the new declaration and its consultative group could disrupt the use of legitimate policy instruments by the United States or any other TPP member is groundless.
These new commitments will take effect upon entry into force of the TPP, possibly in 2017 if Congress passes implementing legislation next year. Adhering to this declaration will be a requirement for prospective new TPP members who seek to accede to the pact in the future.
Are the commitments undertaken in the Joint Declaration enforceable through the dispute settlement procedures of the TPP, as proposed in amendments to TPA that were narrowly defeated in the US Senate? The short answer is no. The negotiators opted for an early warning system via enhanced reporting requirements, and frequent monitoring and consultations to deter future episodes of currency manipulation, instead of the "hard deterrence" approach preferred by some members of Congress that would have involved binding dispute settlement with the possible imposition of trade sanctions against the offending country. The administration argued that the latter approach was not negotiable and would have torpedoed the entire TPP negotiation.
The declaration must also be seen in the context of additional currency legislation included in the Customs and Enforcement bill pending in the Congress. That bill, which has passed in different forms by the House and Senate and is awaiting the report of a conference committee, contains two currency provisions. An amendment sponsored by Senator Charles Schumer of New York would authorize the imposition of countervailing duties against countries found to be manipulating their currencies; it would probably run afoul of WTO obligations and is not expected to survive. On the other hand, an amendment sponsored by Senators Michael Bennet, Orrin Hatch, and Tom Carper—worked out with the administration—would expand Congress' mandate to the Treasury on these issues. It would require Treasury to launch "enhanced engagement" with countries that meet several objective criteria and to implement one or more of a menu of policy measures against designated countries that do not remedy their violations within a year. One of these measures is that the president must "take into account" such a country's currency practices in determining whether to include that country in any future US trade agreements.
In sum, the Joint Declaration substantially meets the negotiating objectives set out in the TPA. Along with the Bennet-Hatch-Carper amendment to the Customs and Enforcement Act, the Treasury should now become more effective in deterring TPP countries from embarking on new episodes of currency manipulation. Added together, these features of the TPP enhance the trade deal's benefits for the United States and the stability of the world economy.